Has Commercial Real Estate Bottomed yet? - Feb 2024 (#8)

Hey dear reader! As many of you already know, your dude Brent is a Commercial Real Estate investor. So, I’ve gotten a lot of questions lately around the same theme:

• What the heck is going on with Commercial Real Estate?

• Did you hear XYZ headline about Commercial Real Estate being way down?

• Has Commercial Real Estate bottomed yet?

• You OK bro?

As a Commercial Real Estate Investor myself I’m eager to lay out my thoughts and then go back to crying myself to sleep at night looking for deals! Lets dive in!

Motivation

Money

Commercial Real Estate is seriously struggling. If you wan’t to get an idea of how bad things are click THIS link and just scroll through what the headlines are at the moment… Ya, not good. So what the heck happened?

As an investor myself I’ve had the joy of experiencing what’s going on firsthand. So let me lay it out the readers digest version for you.

• Interest rates went to HISTORIC LOWS ( I have a loan on a property at 2.5%!!!)

• Low Interest Rates = High Prices, between that and all the money the government has created out of thin air. Virtually all Real Estate prices went through the roof

• During COVID, the government created crazy incentives to buy Commercial Real Estate through their SBA loan programs (as an example, I didn’t have to pay anything on one loan for the first year!)

• Inflation hit, and as a result the Central Bank cranked up interest rates the fastest they have in 40 years.

• Prices went up so high they barely made sense with insanely low rates and now prices make ZERO sense with high rates.

• And so today there is an ENORMOUS mismatch between prices and financing.

How long can this last? Well… something has to give. Either interest rates have to come down or prices have to come down. The central bank looks like it’s not about to slash interest rates anytime soon and Real Estate prices can take YEARS to readjust. As an example, after 2008 happened housing prices didn’t bottom until the end of 2011!!! So ya… it could be a minute.

So what does this mean for the broader economy? Well… banks could be in trouble… again… This time small regional ones. These are the types of banks that primarily lend on Commercial Real Estate.

So when could things get ugly for these smaller banks? More bad news, could be soon… Nearly 1 TRILLION dollars in Commercial Real Estate loans come due in the next TWO YEARS! Which is nearly 20% of the total amount of outstanding Commercial Real Estate debt!

Now, will this cause another 08!? Nah, I really doubt it. As the graph above shows the big banks aren’t the ones the most exposed. Unfortunately, this will likely result in smaller banks being bought on the cheap by larger banks. More consolidation of banks will continue to take place (essentially fewer and fewer banks will exist as they keep combining, which equals less competition… not good). You’ll likely see some wild swings in the stock market, but nothing that’s a show stopper.

So what am I doing? Only things I can do 1. Keep looking for and analyzing deals to keep my skills sharp 2. Trying to pitch every seller I come across on some variant of seller financing (spoiler alert, hasn’t worked yet… but I’ll keep asking!) 3. Low balling baby! (ya… also hasn’t worked yet)

In conclusion, Commercial Real Estate prices likely still have larger to fall unless interest rates get slashed. Until then, the best thing I can do is be ready for when the deals hit and continue trying to create deals with creative structures. Everything moves in cycles and I intend to be ready for when it becomes a full on buyers market again. However long that takes…

FINAL MEMES

End! Later taters!

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